The advent of digital media has brought challenges and opportunity in equal measure. As we continue to make technological advancements, the way we conduct business must develop accordingly.
However, it appears that HM Revenue & Customs have left a lot to be desired when it comes to digital business management with a system of taxation described by many business owners as ‘outdated’.
So with the amount of uncollected tax due to taxpayer error, as well as flawed protocol, now in excess of £8bn per year which costs Britain's public and its businesses respectively, it was time to take action.
In a bid to make the process of paying taxes more accessible and efficient the Government announced the 'Making Tax Digital’ initiative as part of their 2015 Autumn Statement.
The announcement also outlined their plans to ‘transform’ the tax system and scrap tax returns by 2020.
Although unprecedented in the UK, digital tax systems have been already been effectively implemented in countries such as Australia, Brazil and Estonia.
There are plenty of benefits to digital record-keeping, for instance taxpayers using an online tax account are able to get a clearer picture of their tax affairs in real time. Digital tax management also reduces hassle, making it possible for anybody with internet access to remotely monitor their taxes allowing business owners to budget more accurately and save time by placing all of their taxes in one place.
Furthermore, as the digital system requires more regular updates, more taxpayers will be able to use the cash basis of accounting meaning that expenses up to the sum of £166,000 will be deductible. In addition, business will be able to use spreadsheets and cloud accounting services such as Xero to support their digital reports which is guaranteed to expedite the process of paying tax.
Financial Secretary to the Treasury, David Gauke, later highlighted more benefits of a digital switchover, adding that introducing digital record keeping and quarterly updates for businesses will eradicate around 10% of taxpayer error.
Making Tax Digital: The Timetable
MTD is set to be introduced in phases, giving all business owners and landlords at least two years to make the adjustments required to manage their taxes using the new digital service.
The new scheme is due to roll out for Income Tax and Class 4 NI contributions from April 2018. Pensioners and people in full-time employment will be required to use the digital accounts if they earn a secondary income of £10,000 or more from property or self-employment
The proposed changes are due to take action for VAT purposes from 2019 onwards.
Is it for Everyone?
Businesses must make an annual turnover that exceeds the VAT threshold, currently set at £85,000 to qualify for digital VAT record keeping. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to make the switch to the new digital system.
As VAT already requires a quarterly update, this won’t be a major adjustment and taxpayers will not need to report to HMRC more frequently than they already do.
'Smaller' businesses turning over £10,000 or less will be exempt from the change in legislation, but will be allowed to submit reports and quarterly updates on a voluntary basis.
Changes to the submission of Corporation Tax obligations will come into effect in April of the following year. Most British businesses will then be required to keep digital records and update HMRC on their income and expenditure every quarter.
If you need assistance with Making Tax Digital and how to integrate digital systems into your business then talk to an accountant.
This article was written by Cottons Chartered Accountants, small business accountants and audit specialists.